What brokers need to know about reinsurance renewals

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The insurance value chain is a long one: reinsurer, reinsurance broker, insurer, MGA, broker and consumer. So it’s rare that what happens at the very top — reinsurers asking for higher rates — affects what happens at the other end of the spectrum — primary insurance brokers telling their clients they need to spend more.

“It’s only in peak scenarios that reinsurers make a tremendous difference in the results of the insurers,” says Philipp Wassenberg, president and CEO at Munich Re Canada. He notes that for a primary insurance company, reinsurance premiums may make up one or two per cent of their expenses, while claims costs often take up more than half. “Even if [reinsurance costs] change, let’s say 10% per year, up or down, that’s only a tenth of a percent in their own cost difference.”

There’s still “lots of domestic reinsurance capacity for appropriate risks,” says Eric Steen, executive vice-president of reinsurance at JLT Re Canada. But when major claims events occur, reinsurance coverage gets pricey, and trickles down to policyholders. One such example is the Fort McMurray wildfires in May 2016, the largest P&C loss in Canadian history.

“I would suggest the insurance community has been and will continue to be impacted by fires across the country, which will diminish their profit margins, and this will have to be transferred to the insureds — you and me,” Steen says.

Wassenberg notes wildfire is an unmodelled peril because it traditionally doesn’t consume top capital requirements. “If [unmodelled perils] become a problem suddenly and you don’t get enough money for that over time, then there would be repercussions to the availability of a fundamental product,” he says. He adds that while this summer’s B.C. wildfires aren’t on the scale of the Fort McMurray devastation, reinsurers are “very nervous.”

“I would suggest the insurance community has been and will continue to be impacted by fires across the country, which will diminish their profit margins, and this will have to be transferred to the insureds — you and me.”

Reinsurers can’t simply exclude fire from policies — that was the original insured peril when insurance first began. So “wherever there are catastrophe layers with large exposure of potential fire, that is definitely going up in price,” Wassenberg says.

In the past, after large losses such as Hurricane Katrina, Superstorm Sandy and the World Trade Center, “reinsurers did overreact or demand more just to have some earning payback parts built in,” Wassenberg says. He declines to share numbers, citing differences between clients, but argues that in the Fort McMurray aftermath, increases have been “very fair.”

Brokers should also expect rate increases in directors’ and officers’ insurance, says Jeff Turner, partner and managing director, Toronto, at the reinsurance brokerage Beach & Associates. “There’s lots of competition on the primary side and it’s been suffering losses as of late. That’s one of the tougher areas, [where] reinsurers are less likely to give in on rate reductions and are actually more likely to push the rates up,” he says.

He notes increases will be “modest” — likely in the single digits — and tied to areas where reinsurers have seen losses. In June 2017, for example, mortgage lender Home Capital Savings agreed to pay more than $29 million to settle allegations from the Ontario Securities Commission (OSC) and the class-action lawsuit against the company.

“I can’t really comment on any of that,” says Turner, “other than to say reinsurers are on the hook for substantial losses for that. And there are a number of others out there in the market right now,” such as class actions against Valeant Pharmaceuticals and Amaya.

In terms of auto insurance, Steen says that rate increases depend on individual carriers’ performance. On the whole, however, rising costs for repairs and injury claims have thinned primary insurers’ profit margins. And if they’re not making much money, it will cost more for reinsurers to support them, Steen notes.

Last year’s changes in Ontario auto insurance legislation caused “some of the insurers to ask the reinsurers to decrease the premiums,” Wassenberg says. “I think that was premature and the actual severity losses that we are picking up as reinsurers — and I’m not talking frequency because that remains with the insurers — will probably not go down.”